The Economy Is Also Affected by Peer Pressure

Michael Rosenwald writes (on the front page of Thursday’s Washington Post) that even people with job security and good incomes are feeling compelled to “act broke”–maybe out of a mix of contagious fear, compassion (”misery loves company”?), and just plain guilt:

Denise Kimberlin and her husband, Craig, of Woodbridge are government contractors who make nice livings. They recently got raises. They don’t fear losing their jobs.

Yet, something is driving them to change their spending habits. They have cut back by at least $250 a week on clothes, dinners out and other discretionary spending…

The frugality of…[those] Americans who still have their good jobs feed[s] back on the economy, holding down growth and encouraging other worried workers to trim their spending — causing the whole vicious cycle to run another lap.

“It really can become and does become a self-fulfilling prophecy,” Denise Kimberlin said.

Economists say many still-flush consumers are handcuffed by psychological traps that cause them to tighten their purse strings even though economic hardship is not their reality. Underscoring the crucial role that consumer psychology will play in turning around the economy, President Obama and Federal Reserve Chairman Ben S. Bernanke have both been on the hustings this week sounding notes of optimism.

Michael goes on to talk about the influence of “social proof”–which seems a more technical label for “peer pressure” or looking to the behavior of others to guide one’s own behavior. He also mentions a more traditional economic explanation: the (now negative) “wealth effect” on the consumption of high income households.

I actually think that “guilt” has as much to do with it as a desire to “conform” and do what everyone else seems to be doing. A lot of high-income households with secure jobs just “don’t feel right” about engaging in conspicuous consumption right now, even when they know they could afford it.

I think one way for these households to spend what they can afford to spend (and help the economy), without feeling so guilty about putting that on display in front of their friends and neighbors, is to spend it on travel this spring and summer. I have just recently traveled to San Francisco (for pleasure) and Chicago (for work), and I cannot believe how reasonable the airfare and hotel rates were. As Dean Baker just explained in his CPI (consumer inflation) newsletter:

[H]otel prices are plunging. They fell 2.4 percent in March, bringing their annual rate of decline over the quarter to 19.1 percent. This is the result of the enormous overbuilding in the sector.

If you check out the travel websites (e.g., Travelocity, Travelzoo, Cheap Tickets), you’ll be amazed at the bargains that are out there. So if you have a good, stable job and some vacation time available to you, I’ve said this before: it’s a great time to take a vacation and spend your money without the reality of your local economy and maybe your not-so-fortunate neighbors and other peers staring you in the face. So you’ll be helping the economy while “escaping” from it at the same time.

Comments

[CJJ]

Actually, I am a renter, debt-free, employed(although not unworried about job security) and I'm not brainwashed by the "frugality" movement.
Guess what, unemployed people not spending money isn't "frugality" it is "reality".
People who live paycheck to paycheck not spending money they don't have is "a good thing" not "a bad thing".
My savings aren't making crap in the bank. Now is the time to spend it if you got it. Smart people don't need bloggers or trip incentives to get them to spend, its common sense.
This battle of spending vs not-spending is so off base its ridiculous. There is no this vs that. Spend what you can afford. This period is adjusting people's perception in what they can afford.

2009 Apr 17 12:15 AM

[carey_jim]

There is a school of economists, which doesn't get much press, who believe that psychological factors like the ones you are talking about have a far larger role to play than traditional economists believe.

This school isn't completely new however. For example, you refer to 'conspicuous consumption' and that is an expression that was first used, I think, by the sociologist and economist Thorstein Veblen at the turn of the 19th century, in his book The Theory of the Leisure Class (which is still worth reading today.) www.amazon.com/Theory-...

Most advertising uses the technique of showing attractive people using products. Advertisers know that other people will tend to imitate them no matter what the quality of the product. Much, if not most, human behavior is imitative (conformist) and and 'keeping up with the Jones.'

The tendency of human beings to imitate desirable models is so powerful that governments regularly ban advertising for various activities that most people believe harmful such as smoking, taking drugs or underage sex.

But this opens up a can of worms because, as we know, many countries practice behavior which we Americans find abhorrent such as making women wear veils, banning all alcohol or even demonizing business itself (socialists.) (These countries often find our behavior abhorrent also, of course.)

Whoever has control of the propaganda machines, whether it is governments or advertisers, have immense power to influence social behavior, including economic behavior.

2009 Apr 17 11:41 AM

[Leftfield]

Doesn't apply to me, but if you are secure, spending will help others.

Demographics must be huge here. Baby boomers have taken this historic hit to savings. It looks bad for selling their houses at retirement also.

It will be interesting to see how toys of the rich fare. Exotic cars for example. New insanely high-performance and priced, low-volume cars have proliferated. They've been on a multi-decade upswing immune to recession thanks to wealth concentration.

2009 Apr 17 11:36 PM